宏观经济学 教案Chapter12.docx

CHAPTER 12MONETARY AND FISCAL POLICYChapter Outline Open market operations The effects of monetary policy on output The transmission mechanism The liquidity trap and the classical case The zero lower bound Quantitative easing The quantity theory of money Fiscal policy and crowding out Monetary accommodation The effects of alternative policies on the composition of output Policy reactions to booms and recessions Anticipatory monetary policyChanges from the Previous EditionMuch of the theoretical material in this chapter has remained unchanged but part of the chapter has been reorganized. What More Do We Know? Box 12-1 has been moved forward and new History Speaks Box 12-3 (that shows an example of negative interest rates) has been added, with all other boxes renumbered accordingly. New Section 12-2 on the zero lower bound (ZLB) and non-traditional monetary policy has been added, with all following sections renumbered. Figures 12-1, 12-5, 12-11, 12-13 and Figure 1 in History Speaks Box 12-2 have been updated.Introduction to the MaterialChapter 12 uses the IS-LM model that was derived in Chapter 11 to show the effects of monetary and fiscal policy changes on output and the interest rate in various real life scenarios. The effects of different policy mixes are highlighted in the discussion of actual economic events since 1980, with special emphasis on the U.S. recessions of 1981/82, 1990/91, 2001, and 2007-09. This chapter also addresses the policy changes that were enacted by the German government after the re-unification in 1990, and provides an example of interest rates actually falling below zero, as was the case in Denmark in 2012-13.First, ways in which the Fed can conduct its monetary policy are discussed with emphasis on open market operations, the primary tool of the Fed, and how they affect money supply and interest rates. The process by which changes in monetary policy affect the economy is called the transmission mechanism. While this process can be fairly complex, it can be summarized in two basic steps presented in Table 12-1. First, a change in money supply leads portfolio holders to make adjustments in their asset holdings and, as a result, asset prices and interest rates change. Second, the changes in interest rates affect intended spending and thus output.2001, the Fed lowered the federal funds rate target 11 times; however, this time interest rates were reduced much more aggressively and, as a result, the recession of 2001 was much less severe than the one a decade earlier. When discussing these two events, instructors also may want to point out that between these two periods the Fed had switched from announcing changes in the discount rate to announcing changes in the federal funds rate target. While students should be able to distinguish between the discount rate and the federal funds rate, a discussion of why the Fed made this switch should probably be postponed until the Fed's conduct of monetary policy is discussed in more detail in later chapters. As mentioned earlier, some discussion should also concentrate on the issue of what policy actions need to be implemented when interest rates are extremely low.It cannot be stressed enough that anticipatory monetary policy can be very successful but is also somewhat risky, as future economic conditions cannot be forecast with precision. On several occasions during the long expansion of the 1990s, some economists advocated raising interest rates to prevent a possible increase in the inflation rate. But others suggested that there was no need to raise interest rates prematurely since strong global competition would keep prices low despite wage increases. In retrospect, we now know that the policy of keeping interest rates low may have contributed to the stock market bubble of the 1990s, while the Fed's decision to raise interest rates again most likely made this bubble burst, ultimately leading to an end of the longest peacetime expansion in U.S. history. The easy money policy of the 1990s also induced many households to buy homes that they could not afford. This led to a housing bubble which eventually burst also, contributing to the financial crisis that started in 2008. This crisis resulted from a large number of housing foreclosures which caused a decline in the value of mortgagebased securities (which are highly speculative securities whose value is derived from bundles of mortgages), and therefore a decline in the value of the portfolios of many financial institutions. As some major financial institutions failed, concerns about the whole financial system arose and banks stopped lending to each other. The financial crisis quickly spread not only to other countries but also to other sectors of the economy, resulting in a major economic downturn which necessitated massive intervention by the Fed and the Treasury. As mentioned before, short-term interest rates quickly reached the zero lower bound, forcing the Fed to undertake the unconventional measures known as quantitative easing.As History Speaks Box 12-3 points out, interest rates can even go slightly below zero as in the case of Denmark. This case, as well as other events during the world-wide financial crisis, are highly interesting. Nonetheless, instructors may want to wait to present this material until Chapter 17 has been discussed and students understand more about monetary policy options.International linkages won*t be discussed until Chapter 13, but it is important to note here that expansionary fiscal policy and the upwards pressure it causes on interest rates may negatively affect not only the level of investment spending but also the level of net exports. This becomes evident in a discussion of the economic events in the U.S. in the early 1980s and the events in Germany in the early 1990s. In both countries, a policy mix of fiscal expansion and monetary restriction caused high interest rates, resulting in an influx of foreign funds. This led to an appreciation of the domestic currency that resulted in a trade imbalance. In Germany, the situation was more complicated since the European Community's policy to keep exchange rates fixed became virtually untenable, leading to the European currency crisis in 1992. A comparison of the situations in these two countries is a good starting point for the material that is presented inthe next chapter. However, a detailed discussion of these events should be postponed until students are more familiar with the implications of a flexible exchange rate system versus a fixed exchange rate system, that is, until after the material in Chapter 13 has been covered.Additional ReadingsBernanke, B. and Lown, C',"The Credit CrunchBrookings Papers on Economic Activity. 1991.Bullard, James B., “The FOMC in 1991: An Elusive Recovery/9 Review, FRB of St. Louis, March/April, 1992.Bullard, James B., "Quantitative Easing-Uncharted Waters for Monetary Policy,“ The Regional Economist, January, 2010.Carlson, Keith M.9 "Federal Budget Trends and the 1981 Reagan Economic Plan," Review. FRB of St. Louis, January, 1989.Carlson, K. and Spencer R.，”Crowding Out and Its Critics J Review. FRB of St. Louis, December, 1975.Doh, Taeyoung, “The Efficacy of Large-Scale Asset Purchases at the Zero Lower Bound,“ Economic Review, FRB of Kansas City, Second Quarter, 2010.Findlay, David, “The IS-LM Model: Is There a Connection Between Slopes and the Effectiveness of Fiscal and Monetary Policy?” Journal of Economic Education, Fall, 1999.Gali, Jordi, "How Well Does the IS-LM Model Fit Postwar U.S. Data?” Quarterly Journal of Economics, May, 1992.Hamilton, J. and Wu, C.，“The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment/ Journal of Money, Credit and Banking, February, 2013.Koenig, E. and Dolmas, J., "Monetary Policy in a Zero-Interest Rate Economy,“ Southwest Economy, FRB of Dallas, July, August, 2003.Kretzmer, Peter E., "Monetary vs. Fiscal Policy: New Evidence on an Old Debate J Economic Review. FRB of Kansas City, Second Quarter, 1992.Krugman, Paul, "It's Baaack: Japan's Slump and the Return of the Liquidity Trap J Brookings Panel on Economic Activity, 1998.Krugman, Paul, “How Fast Can the U.S. Economy Grow?” Harvard Business Review, July/August, 1997.Kuttner, K. and Posen, A,“The Great Recession: Lessons for Macroeconomic Policy from Japan,“ Brookings Papers on Economic Activity, no. 2, 2001.Morgan, Donald P,Are Bank Loans a Force in Monetary Policy?” Economic Review, FRB of Kansas City, Second Quarter, 1992.McNees, Stephen, “The 1990-91 Recession in Historical PerspectiveNew England Economic Review. FRB of Boston, January/February, 1992.Rubin, Robert, "A Prosperity Easy to Destroy," The New York Times, February 11, 2001.Tobin, James, “Voodoo Curse: Exorcising the Legacy of Reaganomics J Harvard International Review, Summer, 1992.Uchitelle, Louis, "Productivity Gains Help Keep Economy on a Roll J The New York Times. March 22, 1999.Williams, John, “On the Zero Lower Bound on Interest Rates/9 Brookings Papers on Economic Activity, Fall, 2009.Learning ObjectivesStudents should understand the dynamics of adjustment in the IS-LM model following a fiscal or monetary policy change. Students should be aware that the liquidity trap and the classical case represent extreme cases that show the limitations of monetary and fiscal policy in an IS-LM framework. Students should understand the concept of crowding out and know that the degree of crowding out in the IS-LM model depends on the slopes of the IS- and LM-curves. Students should be able to identify the factors that determine the slopes of the IS- and LM- curves. Students should be aware of the limitations of the static, short-run nature of the IS-LM model. Students should know that different policy mixes differ in their impact on the components of aggregate demand and that the choice of policy mix is often determined by political considerations. Students should understand that budget deficits are not always bad and that deficit reduction may (but does not necessarily have to) involve economic contraction. Students should be aware of the motivations for some of the policy choices made over the last few decades and understand how the U.S. economy was affected by these policies. Students should be familiar with the term "zero lower boundn (ZLB) and how it may affect the way a central bank conducts its monetary policy. Students should have some knowledge of the unorthodox policy measures (and the reasons for them) that were undertaken by the Fed and the administration during the financial crisis that started in 2008.Solutions to the Problems in the TextbookConceptual ProblemsLa. Open market operations involve the buying or selling of government bonds by the Fed. The FRB in New York buys or sells U.S. government securities (generally via government bond dealers) under the direction of the Federal Open Market Committee (FOMC). In an open market purchase, the Fed buys bonds from the public in exchange for money. This action increases the monetary base and subsequently the supply of money. In an open market sale, the Fed sells bonds in exchange for money, decreasing the monetary base and therefore the supply of money. An open market sale affects the reserves that are available to banks and therefore their ability to extend credit (make loans).1. b. When the Fed undertakes open market sales, it exchanges government bonds for money. This decreases the monetary base (bank reserves) and thus the ability of banks to generate loans. The resulting decrease in money supply creates a portfolio disequilibrium. The public adjusts by selling other assets, so asset prices decrease and yields (interest rates) increase. Thisincrease in interest rates has a negative effect on aggregate demand (especially investment spending) and therefore output contracts. The lower national income reduces money demand, so interest rates decline again to some degree. But if prices are assumed to be fixed (as in the IS-LM model), then interest rates still settle at a level higher than the original one. In an IS- LM diagram, the LM-curve shifts to the left, leading to a higher interest rate and a lower output level. In the longer run, the decrease in aggregate demand should cause a decrease in prices, increasing real money balances. Therefore the negative effect on output is mitigated in a model in which prices can vary.2. Monetary policy affects the economy by changing interest rates; however, if interest rates cannot change, then monetary policy is rendered ineffective. This is the case in the liquidity trap, when the LM-curve is completely horizontal. In this case, money demand is completely interest elastic, that is, the parameter h in the money demand equation is assumed to be infinitely large.Monetary policy is also ineffective if the IS-curve is vertical, that is, if investment is totally interest insensitive. This is called investment insufficiency. In this case, the parameter b in the investment equation equals zero and the equation changes fromI = Io - bi to I = Io.As a result the monetary policy multiplier is zero as monetary policy cannot affect the level of investment spending.The fiscal policy multiplier is zero if the LM-curve is vertical. This is called the classical case, and money demand (and money supply) is assumed to be totally interest insensitive. Since the parameter h in the money demand equation equals zero, the equation changes fromL = kY - hi to L = kY.In the classical case, an increase in government spending has to be totally offset by a decrease in private (interest sensitive) spending. Since money supply is fixed, money demand cannot change, since otherwise the money sector cannot be in equilibrium. Therefore the level of income has to stay at its original level.Many economists believe that the likelihood that any of these three cases will occur is fairly slim. However, some economists assert that economies were in, or at least close to, a liquidity trap in the U.S. during the Great Depression, in Japan in the late 1990s, or even in the U.S. during the 2007-09 recession.3. A liquidity trap is a situation in which, given a certain interest rate, the public is willing to hold however much money the Fed is willing to supply. In this case, the LM-curve is horizontal and monetary policy is totally ineffective. Fiscal policy (which will shift the IS- curve) is clearly the better choice to stimulate the economy in such a situation, since no crowding out will occur. This means that fiscal policy will have its maximum effect.4. Crowding out occurs when an increase in government spending raises interest rates, which reduces private spending (especially investment). An increase in government purchases (G) increases income (Y) and therefore consumption (C); but because the inte